Friday, March 7, 2008

The relentless upward march in oil prices, which have more than doubled since their Jan. 16, 2007, low point last year, reached yet another new record yesterday, closing at $105.47 on the New York Mercantile Exchange.

The punishing rise in oil prices over the past 14 months has differed from earlier oil price shocks because there has been no single headline disruption in oil markets -- no embargo, no new outbreak of war in an oil-rich nation. Instead, the price of oil has climbed because of a mixture of political tension over Iran, the slide in the dollar's value, OPEC's reluctance to boost production to drive down prices, and the rising tide of investments in commodities as fund managers diversify portfolios, flee sagging stocks and bonds, and seek a hedge against inflation.

One key issue: the value of the dollar. Crude oil is priced in dollars. So when the dollar is falling in value against other currencies, the price of crude oil usually rises. Why? Because European and Japanese importers can still buy oil for the same price in their own currencies even if the dollar price rises. Oil-exporting countries also like higher dollar-denominated oil prices when the dollar goes down so that their revenues cover the same amount of goods purchased in countries other than the United States.

This chart shows that the increase in oil prices is substantially lower in other currencies. But even in euros, Canadian dollars and Japanese yen, the increase in crude oil prices over the past year has been steep.

-- Steve Mufson